One big bump in Wisconsin revenue helps today, but kills a WisGOP excuse for the future

Right on cue, we find out that Wisconsin has a lot more money in the bank today than we originally thought.

The state is expected to take in $753 million more through the summer of 2021 than earlier estimated, giving lawmakers a small windfall as they work on the state budget…

The state will take in the additional funds between now and June 2021 because of better-than-expected income tax collections from individuals and corporations, the nonpartisan Legislative Fiscal Bureau wrote in a Wednesday memo. The increased income tax collections will be offset by collections of sales taxes, cigarette taxes and utility taxes that are not as strong as initially estimated.

The rosy budget news comes as Republican lawmakers carve up Evers' $83 billion, two-year spending plan. They hope to give Evers their version of the budget by next month. He can use his veto powers to make substantial changes to whatever they give him.

I had predicted an upside surprise this morning, after looking at the release from the Wisconsin Department of Revenue from earlier this week. So let’s dig into the LFB’s report and find out why this happened.

Even better than the quantifying of how much more money there’d be, the LFB helps to answer my questions as to why the April numbers were so oddly strong. It was because of money being moved around to match various tax strategies of the last 2 years.

As noted, the primary factor in the increased estimates is unexpected strength in individual income tax collections and corporate income/franchise tax collections. At the time the January estimates were prepared, growth in income tax collections through December, 2018, equaled 5.6%. However, December collections decreased 19.8%, compared to December, 2017, due to lower estimated payments and pass-through withholding. Preliminary data from the Department of Revenue (DOR) indicated that this decrease would likely also occur in January 2019. In January, the decrease in estimated payments and pass-through withholding was attributed to the following four factors: (a) taxpayers accelerating payments in December, 2017, and January, 2018, in response to the federal Tax Cuts and Jobs Act of 2017 (TCJA); (b) pass-through entities whose owners were previously subject to the individual income tax changing their filing status in 2018 to C corporations to take advantage of certain federal tax treatments enacted under the TCJA; (c) pass-through entities previously subject to the state individual income tax electing to be taxed under the entity-level tax created under 2017 Wisconsin Act 368; and ( d) diminished capital gains following the stock market “correction" in the last quarter of tax year 2018. These factors were expected to add volatility to final payments and refunds during the 2018 tax filing season.

The expected decrease in collections did occur in January, as overall individual income tax collections declined by 13.2% compared to the prior January. However, this collection pattern reversed itself beginning in February. Individual income tax collections grew by 22.2% from February through April compared to the three-month period in the prior year, primarily based on stronger than expected collections for estimated and final payments. Individual income tax collections are now anticipated to grow by 5.5% over the remainder of 2018-19, as compared to the prior year.

Let me translate that. Because the GOP Tax Scam from DC was going to make the deduction for state and local taxes (SALT) useless for more Wisconsinites in tax year 2018, many (generally richer) Wisconsinites decided to pay extra state taxes in 2017, then they used the larger refund of state taxes and the lower federal income tax rate to give themselves more income and profit in 2018. Then, they had to pay more state taxes due to the “higher” incomes in 2018, which they paid in early 2019.

These are tricks the little people cannot do.

Corporate collections jumped for many of the same tactics, and another GOP scam at the state level.

At the time of the January estimates, corporate income/franchise tax collections had grown by 23.1 % through December, compared to collections through the same period in the prior year. This higher year-to-date growth was attributed to corporate taxpayers shifting taxable income from tax year 2017 to tax year 2018 by accelerating deductible expenses in response to the TCJA (the federal tax rate for C corporations was reduced from 35% to 21 % beginning in tax year 2018). Corporate collections were expected to moderate over the remainder of 2018-19 as the income shifting effects of the TCJA grew more distant and the revenue reductions associated with certain tax law changes, such as the expansion of Section 179 expensing provisions, were expected to reduce corporate collections. Over the 2019-21 biennium, the January forecast anticipated continued growth in corporate tax collections attributable, in part, to pass-through entities. First, some pass-through entities were expected to change their filing status to C corporations in response to the TCJA. Second, other pass-through entities were expected to pay state taxes at the entity level under Act 368 (the lame-duck laws passed by the GOPs last December). DOR indicated it would report entity-level tax paid by S corporations and partnerships under the corporate income/franchise tax, rather than the individual income tax. Although S corporations could elect to pay the entity level tax retroactively for tax year 2018, Act 368 was not expected to significantly shift the composition of corporate and individual income taxes in 2018-19.

Following the January estimates, corporate tax collections did not moderate as expected from January through April. Instead, collections grew by $330 million compared to the same four-month period in 2017-18. Excluding pass-through withholding (which is reconciled by DOR at the end of each fiscal year), year-to-date collections for 2018-19 are now more than 70% above the comparable period in the prior year. The higher collections are partly attributed to the continued one-time effects of corporations shifting deductible expenses and taxable income between tax years 2017 and 2018 in response to the TCJA. In addition, preliminary data from DOR suggest that S corporations remitted over $115 million to-date, significantly higher than previously estimated, attributable to those entities electing to be taxed at the entity level under Act 368 for tax year 2018 (partnerships were not eligible to elect entity-level taxation in 2018). The higher amount of tax being remitted under the entity-level tax is expected to shift additional revenue that previously would have been reported under the individual income tax to the corporate income/franchise tax and is expected to add volatility in estimated payments, refunds, and final payments under the two taxes over the next few years.

Nice deal if you’re rich or corporate and have the time to do these manipulations (or hire someone to do it), but a lot of this increase is clearly a one-shot deal without underlying job or wage growth. That was reiterated by the fact that sales tax estimates were revised down by the LFB by $280 million between now and June 2021.

One other notable offshoot of the revenue update is that because the 2019 Fiscal Year has such a one-time boost, it’ll also mean the state’s rainy day fund is slated to more than double.

Pursuant to s. 16.518 of the statutes, whenever actual general fund tax collections in any year exceed the estimated amount of collections as shown in the biennial budget act, one-half of the excess is deposited into the budget stabilization fund. 2017 Act 368 directed that the amount of sales and use taxes collected in 2018-19 under the Wayfair decision be excluded from the calculation.

Under these provisions, it is estimated that for 2018-19, $291.1 million would be transferred to the budget stabilization fund.

While that deposit would increase the rainy day fund to $616.5 million, it also lowers the amount of money that would be carried over into the next budget. It’s still a lot of cushion to have – more than $1 billion – but it also means that there isn’t as much money to “play with” as you might think.

Remember, the LFB does not count on the added revenue to lead to bigger surpluses in the next 2 fiscal years. Those projections only grew by a total of $161 million, and so in my rough estimate, there is still a lot that has to be cut in order for GOPs on Joint Finance and in the Legislature to make the numbers balance after they hacked out certain provisions of Evers’ budget last week.

Budget “hole” remaining
Estimated after JFC action May 9 -$1.4 billion
Increased carryover balance $312.2 million
Added revenue in FY 2020 +$63 million
Added revenue in FY 2021 +$93 million
TOTAL BUDGET HOLE REMAINING $925 MILLION

That being said, the extra money does put the spotlight onto what the GOPs in the gerrymandered Legislature will choose to spend these funds on…and what they won’t.

Every single Republican member of the WI legislature who said they'd love to support @GovEvers proposed investments in K-12 public schools & special education "if we had the money" no longer can use that as an excuse. https://t.co/e4pFphL2Xz

— One Wisconsin Now (@onewisconsinnow) May 15, 2019

Watch the GOPs closely now, as they can now have the latitude to choose a responsible budget that gives some increases to roads, schools, and local governments while keeping the tax cuts for their corporate donors, and Evers would likely settle for most of this. Or they can be partisan, play political games, and remove much of Evers’ added investments in favor of Koched-up BS and other cuts that will keep us on the same path…of 8 straight years of subpar job and income growth.

HAHAHAHAHA!!! That’s a joke, son! The ALEC crew would never do anything resembling responsible governance! Had you going there, didn’t I?